South Korean sovereign bonds have cheapened sharply in recent days ahead of tomorrow’s Bank of Korea (BoK) policy decision, primarily due to a rise in global rates following last Friday’s US non-farm payrolls data rather than a change in expectations for domestic policy.  

• Although last week’s CPI data shifted consensus toward a 25bp cut tomorrow, the market has been pricing in an aggressive easing cycle for some time.
• The KORIBOR curve (1-month vs. 12-month) continues to bull-flatten to historically inverted levels, even with a cut tomorrow likely.
• At -25bps, the curve is now substantially lower than mid-2019 levels, just after the BoK began its previous easing cycle. 

Chart 1: BoK Official Rate (%) vs. KORIBOR (1-mth vs. 12-mth) Curve (%)

Source: MNI – Market News / Bloomberg